Malaysia’s carmakers to suffer from AEC competition

The protection granted to Malaysia’s national carmakers Proton and Perodua will cause the country to lose out to neighbours when the ASEAN Economic Community (AEC) comes into effect next year, the Economist Intelligence Unit (EIU) has projected.

In a report summarising the possible effects of the AEC set to be formalised on December 31, 2015, the business advisory services arm of The Economist said Malaysia’s barriers to entry have blunted the competitiveness of both local carmakers and made the country less attractive than giants Thailand and Indonesia.

“The AEC signifies the arrival of a more level playing field, less protectionism and greater competition,” the EIU wrote in its report.

“Malaysia, the third-largest producer, is likely to suffer under the AEC. Foreign firms in the country need to enter joint ventures with local partners, which has produced uncompetitive national brands, Proton and Perodua. More competition will challenge their dominance.”

The AEC aims to create a unified market and production base that theoretically would promote the free movement of goods and labour.

The detriment from the AEC’s liberalisation to Malaysia is two-fold, with the country losing out further on potential manufacturing and assembly jobs as carmakers look elsewhere to set up shop and continuation of government support to prop up local automakers as competitors arrive.

While manufacturers have invested in full-fledged production facilities in Thailand, their Malaysian operations are generally limited to part-assembly operations geared to meet requirements for preferential tariffs and strictly for the local market.

On the consumer side, Malaysians pay some of the world’s highest prices for cars owing to a combination of duties and taxes initially introduced to provide Proton a price advantage, and policies to discourage foreign competition.

With the arrival of the AEC, the EIU said Thailand will extend its dominance as the “Detroit of the East”, as more manufacturers adopt the so-called “Thailand+1” strategy.

The “Thailand+1” approach entails carmakers using Thailand as their manufacturing hub, with secondary plants in Cambodia, Laos, Vietnam or Myanmar – bypassing Malaysia in the process.

In 2013, Thailand accounted for 55 per cent of all cars produced in the region, followed by Indonesia (27 per cent), Malaysia (14 per cent), Vietnam (2 per cent) and the Philippines (2 per cent).

The AEC would theoretically allow firms access to the some 600 million people estimated to be living in ASEAN countries, where demand for cars is accelerating as incomes start to rise.

Protection for national auto makers is a perennial source of discontent among Malaysian buyers, who blame such policies for inflating vehicles prices to the point that average wage earners need nearly a decade to pay off their hire-purchase loans.

Malaysia repeatedly delayed the implementation of the preferential tariff system under ASEAN Free Trade Agreement (AFTA) for automobiles, which saw Thailand emerge as the preferred destination for carmakers looking to set up a manufacturing base in ASEAN, despite Malaysia’s then-larger market.

The delay also allowed other ASEAN countries to penalise some of Malaysia’s exports in return for its delay in full compliance to AFTA.

Proton is often considered the poster child of Putrajaya’s protectionism, leading to allegations that government programmes such as the National Automotive Policy (NAP) are geared towards its favour.

In the latest iteration of the NAP announced in January, Putrajaya backtracked from plans to abolish the controversial approved permits, inviting claims it was doing so to shield local carmakers such as Proton from competitors.

Proton was established in 1983 by the prime minister Tun Dr Mahathir Mohamad in his bid to jumpstart Malaysia’s shift towards manufacturing. In 2012, it was sold to listed industry conglomerate DRB-Hicom.

The protection granted to Malaysia’s national carmakers Proton and Perodua will cause the country to lose out to neighbours when the ASEAN Economic Community (AEC) comes into effect next year, the Economist Intelligence Unit (EIU) has projected.

In a report summarising the possible effects of the AEC set to be formalised on December 31, 2015, the business advisory services arm of The Economist said Malaysia’s barriers to entry have blunted the competitiveness of both local carmakers and made the country less attractive than giants Thailand and Indonesia.

“The AEC signifies the arrival of a more level playing field, less protectionism and greater competition,” the EIU wrote in its report.

“Malaysia, the third-largest producer, is likely to suffer under the AEC. Foreign firms in the country need to enter joint ventures with local partners, which has produced uncompetitive national brands, Proton and Perodua. More competition will challenge their dominance.”

The AEC aims to create a unified market and production base that theoretically would promote the free movement of goods and labour.

The detriment from the AEC’s liberalisation to Malaysia is two-fold, with the country losing out further on potential manufacturing and assembly jobs as carmakers look elsewhere to set up shop and continuation of government support to prop up local automakers as competitors arrive.

While manufacturers have invested in full-fledged production facilities in Thailand, their Malaysian operations are generally limited to part-assembly operations geared to meet requirements for preferential tariffs and strictly for the local market.

On the consumer side, Malaysians pay some of the world’s highest prices for cars owing to a combination of duties and taxes initially introduced to provide Proton a price advantage, and policies to discourage foreign competition.

With the arrival of the AEC, the EIU said Thailand will extend its dominance as the “Detroit of the East”, as more manufacturers adopt the so-called “Thailand+1” strategy.

The “Thailand+1” approach entails carmakers using Thailand as their manufacturing hub, with secondary plants in Cambodia, Laos, Vietnam or Myanmar – bypassing Malaysia in the process.

In 2013, Thailand accounted for 55 per cent of all cars produced in the region, followed by Indonesia (27 per cent), Malaysia (14 per cent), Vietnam (2 per cent) and the Philippines (2 per cent).

The AEC would theoretically allow firms access to the some 600 million people estimated to be living in ASEAN countries, where demand for cars is accelerating as incomes start to rise.

Protection for national auto makers is a perennial source of discontent among Malaysian buyers, who blame such policies for inflating vehicles prices to the point that average wage earners need nearly a decade to pay off their hire-purchase loans.

Malaysia repeatedly delayed the implementation of the preferential tariff system under ASEAN Free Trade Agreement (AFTA) for automobiles, which saw Thailand emerge as the preferred destination for carmakers looking to set up a manufacturing base in ASEAN, despite Malaysia’s then-larger market.

The delay also allowed other ASEAN countries to penalise some of Malaysia’s exports in return for its delay in full compliance to AFTA.

Proton is often considered the poster child of Putrajaya’s protectionism, leading to allegations that government programmes such as the National Automotive Policy (NAP) are geared towards its favour.

In the latest iteration of the NAP announced in January, Putrajaya backtracked from plans to abolish the controversial approved permits, inviting claims it was doing so to shield local carmakers such as Proton from competitors.

Proton was established in 1983 by the prime minister Tun Dr Mahathir Mohamad in his bid to jumpstart Malaysia’s shift towards manufacturing. In 2012, it was sold to listed industry conglomerate DRB-Hicom.